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2011 Half Year Results - 27 July 2011 Strategy review Arch update
Stefan BorgasChief Executive Officer
Leading supplier to the life science industry
slide 2
Forward-looking statementsForward-looking statements contained herein are qualified in their entirety as there are certain factors that could cause results to differ materially from those anticipated. Any statements contained herein that are not statements of historical fact (including statements containing the words “believes,” “plans,” “anticipates,” “expects,” “estimates” and similar expressions) should be considered to be forward-looking statements. Statements herein regarding the proposed transaction between Lonza and Arch Chemicals, the expected timetable for completing the transaction, the potential benefits of the transaction, and any other statements about management’s future expectations, beliefs, goals, plans or prospects also constitute forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty. There are a number of important factors that could cause actual results or events to differ materially from those indicated by such forward-looking statements, including: the timing and strength of new product offerings; pricing strategies of competitors; the company’s ability to continue to receive adequate products from its vendors on acceptable terms, or at all, and to continue to obtain sufficient financing to meet its liquidity needs; uncertainties as to the timing of the tender offer and merger; uncertainties as to how many shareholders will tender their stock in the offer; the possibility that various closing conditions for the transaction may not be satisfied or waived; and the effects of disruption from the transaction making it more difficult to maintain relationships with employees, customers, and other business partners; and changes in the political, social and regulatory framework in which the company operates, or in economic or technological trends or conditions, including currency fluctuations, inflation and consumer confidence, on a global, regional or national basis. Except as otherwise required by law, Lonza disclaims any intention or obligation to update any forward-looking statements as a result of developments occurring after this presentation was made.
2011 Half Year Results – 27 July 2011
slide 3
Agenda
H1 results and outlook
Financial highlights
Business highlights
Sectors
Strategy update
Arch acquisition update
2011 Half Year Results – 27 July 2011
slide 4
2011 Half Year Results – Financial highlights
Revenues increased 4.8%, EBIT increased 4.6% in constant currencies
Strong headwind from currencies resulted in EBIT impact of CHF -44 mn
Positive results driven by increased capacity utilization in biological custom manufacturing
Sales of CHF 1193 mn (-8.3 %), up 4.8% in constant currencies
EBITDA margins solid at 22.2%, 23.6% in constant currencies
EBIT of CHF 136 mn, margin 11.4% or 13.3% in constant currencies – similar to H1 2010
Core EPS at CHF 2.09/share (-22% vs. H1 2010); +3.7% in constant currencies
RONOA 8.4%
Cash flow before change in NWC of CHF 213 mn
CAPEX at CHF 117 mn (CHF 152 mn in H1 2010)
2011 Half Year Results – 27 July 2011
slide 5
2011 Half Year Results – Key financial figures
* = in %; (1) CER = constant exchange rates 2011 Half Year Results – 27 July 2011
CHF mn 1st half 2010 1st half 2011 Change YoY * CER 1
Sales 1 301 1 193 (8.3) 4.8EBITDA 309 265 (14.2) 3.9EBITDA margin 23.8% 22.2% 23.6%EBIT 173 136 (21.4) 4.6EBIT margin 13.3% 11.4% 13.3%Financing costs (21) (19) (9.5)Tax rate 14.0% 14.0%Profit for the period 135 97 (28.1) (2.2)EPS (CHF) basic 2.62 1.90 (27.5) (2.3)EPS (CHF) basic CORE 2.69 2.09 (22.3) 3.7
Cash flow before change in net working capital 255 213 (16.5)Change in net working capital 91 84 (8.7)Capital expenditures 152 117 (23.0)RONOA 9.7 8.4Net debt 1 251 1 249 (0.2)Number of employees 8 220 8 306 1.0
slide 6
Lonza overall
Underlying satisfactory demand growth in all markets
Continuing and increasing strong translation and transaction effects (Visp site) due to strong CHF
Countermeasures to offset strong Swiss franc launched at the Swiss sites (increased working hours)
Raw material prices increased until mid of Q2 and remains at high levels
Growth projects moving forward
Regulatory approval processes remain stringent and unpredictable
Lonza Life Science Ingredients
Market demand high but margins are substantially impacted by FX, increasing raw material prices and competition induced price pressure in certain markets
Microbial Control on target
Lonza Custom Manufacturing
Increased project pipeline and capacity utilization in both Chemical and Biological Manufacturing
Strong performance in Development Services
Lonza Bioscience
Cell therapy experiencing a solid recovery with new clinical candidates moving forward
Governmental funding remains constrained
2011 Half Year Results – Business highlights
2011 Half Year Results – 27 July 2011
slide 7
EBIT bridge H1 2010 – H1 2011
178
9
44
2021
173136
189
0
0
50
100
150
200
250
EBIT H1 2010 Re-EngineeringCost Benefits
Underlying EBIT growth
Singapore start-up,
Japan, Libya
Delayedapprovals, Product mix
RegularEBIT
Higher RawMaterialCosts
FX EBIT H1 2011
slide 8
Lonza’s life-science platform
Custom Manufacturing
Nutrition Ingredients
Microbial Control
Performance Intermediates
Therapeutic Cell Solutions
Testing Solutions
Research Solutions
Chemical Manufacturing
Biological Manufacturing
Development Services
Life Science Ingredients Bioscience
2011 Half Year Results – 27 July 2011
slide 9
Financial summary and highlightsEBIT and margin progressionKey figures
Volume increase in all businesses except agrochemicals
Microbial Control on track: picking up in Asia
Lower margins due to higher raw material prices and unfavorable exchange rates - price increases passed on with expected time lag in most areas
Growth projects under full execution
CHF million 1st-half 2011 Change YoY * CER (1)
Sales 519 (3.2%) 9.3%
EBIT 41 (49.4%) (29.6%)
Margin 7.9% 9.7%
EBITDA 78 (33.9%) (19.5%)
Margin 15.0%
7.9%
15.1
%
14.0
%13
.5%
13.6
%
15.2
%14
.6%
14.8
%
0
25
50
75
100
H1/
04H
1/05
H1/
06H
1/07
H1/
08H
1/09
H1/
10H
1/11
EB
IT (C
HF
milli
on)
5%
10%
15%
20%
25%
30%
EB
IT M
argi
n
EBIT (CHF mn) Margin
Life Science Ingredients
2011 Half Year Results – 27 July 2011* = in %; (1) CER = constant exchange rates
slide 10
Life Science IngredientsNutrition Ingredients
Vitamin B3 sales volumes on target despite a difficult market environment; margins continue to be impacted by increased raw materials and competition
Metaldehyde volumes lower due to dry weather conditions; promising outlook based on a re-registration for European markets
Performance Intermediates
High volumes and solid margins in high performance materials driven by electronics, aerospace and construction industries
Commodity margins under significant pressure due to high European acetic acid prices and strong CHF (Visp cost base)
Weak volumes in agro custom manufacturing but strong order placement over next 12 months
Microbial Control
Sales increased by 9.5% (constant currencies) in western markets in H1
Strong sales performance in China with significant pick-up in Q2
Hygiene and wood above target
Raw material prices remain volatile
2011 Half Year Results – 27 July 2011
slide 11
Num
ber o
f pro
ject
s
Project pipeline (new products)
Life Science Ingredients
0
20
40
60
80
100
120
140
End of 2007 End of 2008 End of 2009 End of 2010 Q1/2011 Q2/2011
Implementation Development Innovation/Discovery
2011 Half Year Results – 27 July 2011
slide 12
Lonza’s life-science platform
Custom Manufacturing
Nutrition Ingredients
Microbial Control
Performance Intermediates
Therapeutic Cell Solutions
Testing Solutions
Research Solutions
Chemical Manufacturing
Biological Manufacturing
Development Services
Life Science Ingredients Bioscience
2011 Half Year Results – 27 July 2011
slide 13
Sales stable and increased EBIT margins
Continued good pipeline increase in both Chemical and Biological Manufacturing
Robust contract signing increases long-term capacity utilization
Order placements from existing customers ensures stronger H2
Visibility continues to increase but volatility remains
Custom ManufacturingEBIT and margin progressionKey figures
CHF million 1st half 2011 Change YoY * CER (1)
Sales 568 (13.7%) (0.9%)
EBIT 98 4.3% 34.0%
Margin 17.3% 19.3%
EBITDA 179 (1.1%) 18.8%
Margin 31.5% 33.0%
2011 Half Year Results – 27 July 2011
0
25
50
75
100
125
150
H1/
04
H1/
05
H1/
06
H1/
07
H1/
08
H1/
09
H1/
10
H1/
11
EB
IT (C
HF
milli
on)
0%
10%
20%
EB
IT M
argi
n
EBIT (CHF mn) Margin
9.0%
13.3
%
16.3
%
18.2
%
18.4
%
12.9
%
14.3
%
17.3
%
* = in %; (1) CER = constant exchange rates
slide 1428-Jul-11
Chemical Manufacturing
High capacity utilization, backed by robust demand for all technologies
Reduced profitability due to product mix
Pipeline increase especially in strategic new technologies
Increasing demand for HAPI (highly active pharmaceutical ingredients)
CHF 25 mn investment into new cytotoxic facility in Visp expands center of excellence for high potency manufacturing
Nansha site with first FDA approval and start-up of cGMP kg laboratory
Regulatory challenges and approval weakness in peptides addressed with exploration of innovative solutions and new pipeline gains
Custom Manufacturing
Business highlights (I)
2011 Half Year Results – 27 July 2011
slide 1528-Jul-11
Biological Manufacturing
High capacity utilization
New Singapore facility complete and started-up on time
Process qualification / validation for the first commercial product initiated
Received Silver Operational Safety Award by Singapore’s Ministry of Manpower
Strong pipeline development to balance ongoing approval volatility
Approved GBP 16 mn (CHF 21 mn) investment in Slough (UK) facility expansion
Development Services
New GS System™ medium and feed platform reaches 10g/L resulting in higher yields, more reliable process, lower cost of goods
Launch of LightPath™: efficient and focused material supply service for early stage novel biologics development
R&D expansion in Singapore to meet increasing global demand for Development Services
Custom Manufacturing
Business highlights (II)
2011 Half Year Results – 27 July 2011
slide 16
0
25
50
75
100
2004 2005 2006 2007 2008 2009 2010 Q1 2011 Q2 2011
Chemical Manufacturing – Pipeline and utilization
Capacity utilization (in %)
Project pipeline (Number of projects)
Custom Manufacturing
0
50
100
150
200
250
300
350
End of2004
End of2005
End of2006
End of2007
End of2008
End of2009
End of2010
Q1 2011 Q2 2011
preclinical
phase I
phase II + III
launched
2011 Half Year Results – 27 July 2011
slide 17
0
25
50
75
100
2004 2005 2006 2007 2008 2009 2010 Q12011
Q22011
Project pipeline (Number of projects)
Capacity utilization (in %)
Biological Manufacturing & Development Services: Pipeline and utilization
Custom Manufacturing
2011 Half Year Results – 27 July 2011
0
50
100
150
200
250
300
350
End of2004
End of2005
End of2006
End of2007
End of2008
End of2009
End of2010
Q12011
Q22011
preclinical
phase I
phase II + III
launched
slide 18
Lonza’s life-science platform
Custom Manufacturing
Nutrition Ingredients
Microbial Control
Performance Intermediates
Therapeutic Cell Solutions
Testing Solutions
Research Solutions
Chemical Manufacturing
Biological Manufacturing
Development Services
Life Science Ingredients Bioscience
2011 Half Year Results – 27 July 2011
slide 19
12.8
%
15.0
%
6.8%
14.6
%
8.5%
0
5
10
15
20
25
H1/
07
H1/
08
H1/
09
H1/
10
H1/
11
EB
IT (C
HF
mill
ion)
0%
5%
10%
15%
20%
25%
EB
IT M
argi
n
EBIT (CHF mn) Margin
Financial summary and highlights
Double digit sales growth at constant currency (+13.2%) in almost all areas (except Research Solutions)
EBIT decline mainly due to currency effects, lower capacity utilization in custom manufacturing and approval delays in Therapeutic Cell Solutions, and weak US academia spending
New product launches:
4D Nucleofector™ launch complete with good market acceptance
First products and services launched for stem cells
EBIT and margin progressionKey figures
CHF mn 1st half 2011 Change YoY* CER (1)
Sales 103 (2.8%) 13.2%
EBIT 7 (22.2%) (22.2%)
Margin 6.8% 5.8%
EBITDA 14 (17.6%) (11.8)
Margin 13.6% 12.5%
Bioscience
2011 Half Year Results – 27 July 2011* = in %; (1) CER = constant exchange rates
slide 20
BioscienceResearch Solutionsn Strong sales growth in EU and Asia driven by cell assays, nucleofection and
bulk agarose
Lower than 2010 sales to academia due to reduced research spending in USA and EU
Testing Solutions
Endotoxin business grew in all regions
Increased customer interest in MODA paperless quality-control solutions but long sales cycle due to budget constrains at customers
MicroCompassTM launch delayed till Q1/2012 due to technical issues with hardware
Therapeutic Cell Solutions
Strong increase media revenue compared to H1/2010
Lower capacity utilization due to delays in regulatory approvals
Significantly increased interest in viral capabilities and viral fill & finish: capacity expansion approved
Bioscience
2011 Half Year Results – 27 July 2011
slide 21
Bioscience project pipeline – New products and therapeutic clients
New products (Research Solutions, Testing Solutions & Therapeutic Cell
Solutions)
Therapeutic clients (Therapeutic Cell Solutions)
0
50
100
150
200
250
Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011
Num
ber o
f pro
ject
s
Proof of Principle
Early Development
Late Development
Transfer toManufacturingLaunch
0
20
40
60
80
100
120
140
160
180
Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011N
umbe
r of p
roje
cts
Preclinical
Phase IPhase II + III
Commercial
2011 Half Year Results – 27 July 2011
slide 22
Summary
Revenues and EBIT increased by 5% at constant currency
Underlying business growth for 2011 on track
New contracts signed
Increased capacity utilization
New technologies and development services performing well
EBITDA margins resilient
CHF -44 mn currency impact (strong CHF, weak USD, EURO, GBP)
Countermeasures launched at the Swiss sites
Growth projects moving forward
Strong cash flow and balance sheet
2011 Half Year Results – 27 July 2011
slide 23
On track to deliver continued underlying revenue and EBIT growth
Currency impact of strong Swiss franc actively managed:
Short term mitigation in Visp and Basel through immediate increase in working hours
Mid term improvement project Visp will focus on productivity increase, introduction of new technologies and portfolio upgrades
Long term growth potential based on core strength and sharpened strategy
Life science strategy validated: outsourcing trend intact and new contracts signed
Build a second global leading business by acquiring Arch and merging with Lonza Microbial Control
Outlook
2011 Half Year Results – 27 July 2011
Lonza Group – Strategy review
slide 25
Strategy review
Increasing volatility in pharma markets, especially CMO
Need to capture new business opportunities in BRICS
Opportunity to capture more of the value chain downstream
Raw materials price inflation
Currency impact of strong Swiss franc
Address unsatisfactory business performance in Bioscience and peptides
Initiated by Lonza Management Committee and the Board of Directors
Intensive involvement of 150 Lonza leaders
9 months process
Sharpen direction of Lonza Group on 5 year view
Bottom-up business plans per business unit
Defined growth projects
Recognizing the challenges
Approach
Outcome
slide 26
Key findings
Products and services that are complex, regulated and contact the human body: pharma, anti- microbial, nutrition, agriculture, personal care
n Key strengths and focus in innovation scale-up and market introduction
n Innovation partnerships and alliances will become more important
n From the active ingredient towards formulations, packaging and distribution
n Partnerships to become more important
Lonza's life sciences focus confirmed
Lonza remains innovation and technology driven
Deepen the value chain towards consumer / patient
Balance of business portfolio n Further balance of CMO vs non CMO, pharma vs. other life science markets, currencies, regions
Cross divisional synergiesn Lonza’s businesses benefit from each other via
manufacturing, research, regulatoryn Peptides, Bioscience to start benefit from other
businesses
slide 27
Moving closer to consumer / patient
Pharmamarkets
Life science markets
(beyond Pharma)
Research markets
Continued strong technology development at 4-5% of sales (R&D expenses: CHF 140 mn
CHF 200 mn)
Expand into Asia 12%
18%
Biogenerics and genericspartnerships and organic growth
Classical Lonza: active substances(chem & bio molecules)
Continue to expand leadership in pharmaceutical custom manufacturing organic growth, capex driven
Build global leader in Microbial Controlfocus on integration, synergy, innovation, growth
Refocusing Lonza – Major projects
slide 28
Examples
Microbialcontrol
Creating the global leader in microbial control with the proposed acquisition of Arch Chemicals
Move up the value chain into B2C business
Strong platform to develop innovative new products and solutions
Strengthens and balances Lonza’s portfolio and allows further expansion into BRICS markets
Biosimilars
Development of affordable biosimilars in JV with Teva
Move towards patients
First product in clinical trials
Expansion of selected products currently under evaluation
Formulatedproducts
Extend the approach taken on biosimilars to small molecule generics
Develop off-patent formulated drug products (with product registrations) for sale via partner (with focus on emerging markets)
Lonza to be recognized as leading supplier of specialized products and the supplier of choice for local marketing specialists
slide 29
External Partnerships
2011 - 2016 Lonza Strategy: Building on our strengths
In clearly defined life-science markets,we focus on customers’R&D and manufacturing needs,as well as end- consumer needs.
We offer technology solutions based on biological and chemical platformsand end-use applications within these platforms.
We deliverOperational Excellencein innovation, leadership, operations and all processes which are valued by our customers.
1 2 3Technology and Innovation
Sustainable and profitable growthRONOA >15%
Safety & H
ealth Environm
ent & Energy
Consumers Patients Customers
OUR VISION We strive to be the leading supplier using science and technology to improve quality of lifeOUR MISSION We work with passion, using advanced technologies to transform life science into new possibilities for our customersOUR VALUES Influential, Enterprising, Connected
Proposed acquisition of Arch fits our strategy perfectly
27 July 2011
Arch update
slide 31
Expands life science platform. Balances solidly growing but volatile pharma CMO business
Arch strengthens and balances Lonza’s portfolio
Strengthens and expands business in growth markets of China, India, Brazil and South Africa from USD 35 mn sales to now USD 249 mn sales
Improves natural currency hedge
cost : revenue (in %)
2010 2012
USD 40:50 47:50
EUR 18:20 19:20
Moves Lonza closer to the end consumer
slide 32
Arch balances the Lonza life science platform
Lonza Bioscience
(10%)
Lonza Custom
Manufacturing (50%)
Lonza Life Science Ingredients –
Nutrition & Performance Intermediates
(26%)
Lonza Microbial Control & Arch(43%)
Lonza Custom
Manufacturing(35%)
Lonza Bioscience(5%) Lonza Life Science
Ingredients Nutrition & Performance
Intermediates(17%)
Lonza Microbial Control(14%)
Sales CHF 2680 mn Pro-forma sales CHF ~4116 mn
Based on 2010 full year results
TodayToday TomorrowTomorrow
slide 33
Microbial Control – A life science businessArch is not a chemicals business !
CHEMICALS / CMO LIFE SCIENCES
Capex heavy Capex light
Low RONOA High RONOA
Production cost and process driven
Low level of R&D and innovation
Regulation expertise limited
Application and customer integration driven
R&D and innovation is major driver
Regulation expertise a critical success factor
• Arch
• Arch
• Arch
• Arch
• Arch
slide 34
scal
e
Increasingly regulated environment• Combined business has over 15% global market share
Customer demands create inter-regional cross selling opportunities• Combined business has strong position in 5 growth market segment
Leverage proven technologies across the globe• Combined business has 19 registered actives
Emerging markets represent attractive growth opportunities• Combined business has access to 4 of 5 BRICS markets
Get closer to the end consumer with broader offerings and scale• Arch brings direct access to retail in US, EU, South Africa, Brazil
Combined global innovation provides a key competitive advantage• Combined business allows above average increase in R&D efforts
Combined business meets all critical success factors
slide 35
Attractive value creation from year one
Expected to be EPS accretive from year one (>CHF 0.4/share)
Expected to be EVA positive from year two
Also increases Lonza’s FCF generation and improves RONOA by > 150 bp in year 2
At least USD 50 mn targeted in year two
One-time integration cost of USD 85 mn over two years
Cross selling of larger product portfolio
Extended market and regional reach
Additional potential in the future driven by increased R&D efforts
Meets Lonza’s acquisition criteria
Substantial cost synergy from administrative functions
Increased sales of at least USD 40 mn by year three
slide 36
Transaction update
Stakeholder feedback very positive: employees, customers, shareholders
Tender offer commenced 15 July 2011
Antitrust regulatory approval submissions anticipated in US, Germany and France
Bridge finance committed, mandate letter executed
Completion expected later in 2011
slide 37
Important Lonza Group dates
27 October 2011 Third-quarter 2011 business update
25 January 2012 Full Year Results 2011
03 April 2012 Annual General Meeting
25 April 2012 First-quarter 2012 business update
• ContactsDominik Werner Dirk OehlersCorporate Communications Investor RelationsT +41 61 316 8798 T +41 61 316 8540F +41 61 316 9798 F +41 61 316 9540 [email protected] [email protected]
Calendar of events and contacts
2011 Half Year Results – 27 July 2011
slide 38
Additional information
This communication is for informational purposes only and is not a recommendation, an offer to purchase or a solicitation of an offer to sell shares of Arch Chemicals. LG Acquisition Corp., Lonza’s indirect wholly owned subsidiary, has filed a tender offer statement on Schedule TO with the U.S. Securities and Exchange Commission, and Arch Chemicals has filed a solicitation/recommendation statement on Schedule 14D-9 with respect to the tender offer. Investors and Arch Chemicals shareholders are strongly advised to carefully read the tender offer statement (including the offer to purchase, the letter of transmittal and the related tender offer documents) and the related solicitation/recommendation statement, as well as any amendments thereto and other relevant documents filed with the SEC when they become available, because they will contain important information. Investors and Arch Chemicals shareholders may obtain a free copy of the tender offer statement, the solicitation/recommendation statement and other documents (when available) filed with the SEC at the SEC’s website at www.sec.gov. The tender offer statement and other documents that LG Acquisition Corp. files with the SEC may also be obtained free of charge by directing a request by mail to MacKenzie Partners, Inc. at 105 Madison Avenue, New York, New York 10016, by calling toll-free at +1 800 322 2885 or by email to [email protected].
slide 39
2011 Half Year Results - 27 July 2011 Strategy review Arch update
Stefan BorgasChief Executive Officer
Leading supplier to the life science industry
slide 40
Mid-term Additional EBIT Potential Mid-term Targets Reiterated*
Solid Additional
EBIT Potential for ~ 2013
Custom Manufacturing
Life Science Ingredients BioscienceSECTORS
Additional Operations 10-15 mn CHF
Nansha, CN 10-15 mn CHF
Peptides 15-25 mn CHF
Microbial Operations20-40 mn CHF
Cell Therapy15-25 mn CHF
Cost Savings Program 70-80 mn CHF
Singapore 40-60 mn CHF
Long- Term
2014/15 - 2020
Fill + Finish
Technology AcquisitionsBiosimilars
Emerging Markets
RISK POTENTIAL
Completed
Medium Risk
Low Risk
High Risk
* at constant exchange rate 2009